IN DEPTH: Good Energy To Stay Profitable But New Entrants May Struggle

(The following article is an example of executive interviews by Alliance News journalists.)

14 Sep 2016, 16:00:17 BST

LONDON (Alliance News) – The chief executive of Good Energy PLC is confident she can continue to improve customer service while still maintaining margins as the renewable energy supplier undergoes substantial growth over the next few years, claiming newer entrants are not destined to make any profit.

Good Energy has been one of a slew of new independent energy suppliers that have entered the UK market in recent years as regulators continue to clamp down on what they say is the poor service and high prices that have resulted from the stranglehold of the Big Six suppliers.

However, that tight grip is loosening, as the Big Six have lost customers over the past year or so whilst smaller and independent suppliers have broken into the market and wooed customers by making deeper price cuts and finding ways to differentiate themselves.

Good Energy boasts the fact that it only supplies 100% renewable energy and, whilst still small on the domestic front with around 0.21% of the UK market, the company is growing its focus on business customers whilst restructuring its domestic offering.

However, Good Energy Chief Executive Juliet Davenport told Alliance News in an interview that, despite being a small player in the current market, newer entrants aiming to snap up a piece of the market look destined for failure.

“If you look at some of the new entrants coming into the business, from the maths we do, we don’t believe some of those business models are sustainable and the models do not seem to have been made to make money. And if you look at some of the financial results then you can see some of the significant losses being made by those companies,” she said.

Good Energy also fancies itself against closest London-listed peer, Flowgroup PLC, which operates a domestic supply arm named Flow Energy, launched in April 2013. Flowgroup posted a gross margin in the first half of the year of just 12.2% versus Good Energy’s 33.5%.

The threat for new entrants into any market is maintaining their offering and margin whilst growing the business. Good Energy is expecting substantial growth for at least the next four years and is around a third of the way to achieving its target.

“We have a very ambitious five-year growth target, and we made some excellent progress over this year toward building the platform to deliver that five-fold increase in customer numbers by 2020,” Davenport told Alliance News.

Customer accounts should reach 900,000 by 2020. Currently, Good Energy has around 240,000 customers spread over electricity, gas and the feed-in-tariff. Notably, Good Energy is planning on adjusting the way it measures customer numbers to reflect the influx of business accounts during the first half of 2016.

“One of the other things we have done is focus on business customers, which are more likely to opt for renewable energy than a couple of years ago. We are seeing strong growth in that but when we speak about our 900,000 customer target, we take a business customer by the average usage of a domestic customer to give a household equivalent and that is how we build up toward our target,” said Davenport.

That means that one business customer could be counted as 10 household equivalents, for example.

“We will look to do toward the end of the year is bring in a household equivalent, customer equivalent metric to show the tracking a little more closely. Currently, we are around a third of the way to our target if you bring in the business customers and convert them into household equivalents,” she added.

Although business customers are more likely to need more energy than a domestic account, that also means the price they pay is lower, providing another potential threat to margins as the company carries out its ambitious growth plans, but Davenport said that, whilst the market can expect some change in Good Energy’s gross margin, the company is focused on building a “sustainable and profitable business”.

In terms of domestic accounts, Good Energy is still growing rapidly but the increase in customer accounts in the first half of 2016 was at a slower rate than the second half of 2015 when a collective switch really boosted growth. Customer accounts at the end of June were still 30% higher than a year ago.

Good Energy is continuing to focus its attention on business customers, whilst it implements new billing systems and offerings for domestic customers, prompting the company to set not very ambitious growth targets for the domestic arm in 2016. Domestic growth should pick up late this year and then into 2017 and beyond.

“As we look forward, we expect to see an acceleration of growth when the billing system is rolled out before year-end. We will test, embed it, and then ramp up, which should lead to growth in the second half of 2017,” said Davenport.

Although there is an expectation for growth in numbers, the supply business in the second half will be less profitable in the second half than the first if normal weather patterns continue.

“Customer retention is one of the highest in the industry. We churn between 7% to 8% of customers. Market churn is around 15% to 16%, and for some of the new entrants who are very much driven by pricing propositions, their churn can be as high as 25%. This is where the long-term value of the business, customers staying with us – being sticky,” said Davenport.

Good Energy also recruited around 2,000 customers as shareholders through a share offer launched just before the UK’s European Union referendum result earlier this year. Customers investing in the business has helped boost retention levels.

“We expect to see a strong performance for the rest of the year and remain on track to deliver full-year market expectations,” said Davenport.

Good Energy also boasts “award winning customer service” and uses its net promoter score as a key metric to evaluate its performance, which stood at 46% in the first half.

“To put that into a little bit of context, the highest of the Big Six is around minus 18% and other smaller suppliers, Ovo Energy for example are at 40%, First Utility are at 45% – so we think we compare very favourably and that clearly helps drive the amount of customers that want to switch to us,” said Davenport.

However, a report published at the start of this month by Citizens Advice showed that Good Energy, which was near the top of the customer service table earlier this year, had reported a large rise in complaints and dropped down the league table from eighth to behind Flow Energy in eleventh place.

Good Energy reported 153.2 complaints in the second quarter compared to only 92.2 complaints in the first.

“I don’t think there was a significant rise. Some of that will be off the back of customer growth and I have to say it’s an area we take incredibly seriously. We are probably better at reporting complaints than perhaps we were, so you may see an element of that reflected in the numbers,” Davenport told Alliance News.

“There has been some increase in [complaints] but it is an area we are focusing on, it is a snapshot in time and if you look at the Which? customer survey it would show very high levels of satisfaction. MoneySavingExpert is another one that would show that. Sometimes the surveys are covering small populations but that is not to dismiss them though,” she added.

Good Energy’s first half results, issued on Tuesday, were all moving in the right direction. Revenue was up 40% year-on-year to GBP45.6 million, gross profit was up 50% to GBP15.3 million and pretax profit almost trebled to GBP1.4 million.

The dividend, however, remained flat year-on-year at 1.0 pence per share.

“The expectation was flat for the dividend…It is something we will look at on an annual basis, so we will have a discussion with the board. We are trying to balance the fact that we are still a growing business,” said Davenport. “In a period of strong growth, I wouldn’t imagine we would become a dividend-led stock.”

Davenport reflected on recent changes to the UK energy market, namely the cut to renewable energy subsidies and the current uncertainty whilst the Conservative government under the new Prime Minister Theresa May decides what its future energy policy will be.

“I really hope the government will step back and think about what they can do to meet those targets that they are missing, but I certainty wouldn’t want to take a punt on what they are doing at the moment,” Davenport said.

Davenport said the cut to subsidies for renewable energy was “right thing” because businesses have to be able to stand on their own two feet but said what was unhelpful was the way it was done so quickly, creating uncertainty.

“What I would hope from the new government is that they are introducing any changes in the future that they consider the impact on businesses and investor confidence, but there is very little subsidy left that could now be cut. I think one area they could look at is the contracts-for-difference and how that could operate more fairly,” said Davenport.

Contracts-for-difference cover energy that is sold under contract whereby the the seller will pay to the buyer the difference between the current value of an asset and its value at contract time.

“In certain instances, certain amounts have been set aside for certain technologies, so you are not always operating on a fair playing field and actually awarding contracts to the most effective and efficient technologies. We would hope it is operated more broadly so other technologies get the opportunity to participate in those auctions,” Davenport added.

Good Energy shares are trading 8.3% higher than the start of 2016 but 0.4% lower than one year ago. The current market capitalisation stands at GBP36.8 million.